Dividend plays on slippery ground as bond yields steepen

Dow Jones index and Steven Wieting

GETTY•BLOOMBERGDow Jones index Steven Wieting warned volatility could be set to continue in markets

United States 10-year Treasury yields fell away from 4-year highs at around 2.84 percent.

The Dow's drop Monday was its biggest in terms of points, but it had a larger percentage drop as recently in 2011.

It's healthy and normal for equity markets to experience pullbacks - average annual drawdowns in any given year can easily exceed 10% (historically the average largest intra-year decline for the S&P 500 would be around 13%, for example) and on average still deliver positive total returns on a full year basis.

While US bond yields have been rising on expectation of faster economic recovery and a possible spike in inflation and thus interest rates, in India the sharp increase in bond yields over the past few weeks have been attributed to concerns over the government's fiscal slippage in FY18 and a higher-than-expected fiscal deficit target for FY19. The Dow fell more than 1,000 points over two sessions. The Dow ended at 24,345.

Only last month the Dow and benchmark S&P 500 index had their best monthly gains in two years, with stocks reaching record levels on January 26, supported by the benefit of a cut in USA corporate taxes in December, rising earnings, and healthy global economic growth.

US stocks looked set to open lower on Monday as rising bond yields continued to fuel the selloff in equities and hints of inflation pickup triggered concerns that the Federal Reserve might have to raise interest rates more quickly.

"Given that for a long time the dividend yield on the S&P 500 was higher than the 10-year treasury yield, investors had gravitated from bonds to equities and their income", said Jack Ablin, Chief Investment Officer at Chicago-based BMO Private Bank.

The prices are being impacted by fears of inflation rising and a perception that central banks will increase rates sooner than previously thought.

Most Asian and European stock markets slumped on Monday on intensifying worries over the prospect of rising interest rates in the United States, dealers said.

Investors are also nervous about bond yields as the Treasury is due to significantly increase issuance this year to make up for declining Fed purchases. For every increment in the oil price, breakeven inflation has risen less in recent months than it did in the past.

The stock market has climbed to record peaks since President Donald Trump's election and remains up 23.8 per cent since his victory.

On Monday, the stock selloff accelerated, drawing investors back into lower risk bonds. Both companies reported disappointing fourth-quarter results on Friday and are coming off their biggest losses in years. That hurt banks by sending interest rates lower, which means banks can't charge as much money for mortgages and other types of loans.

The yen was slightly firmer at 110.08 per dollar.

Gold declined 80 cents to $1,336.50 an ounce. Now if you reverse PE (i.e. 1/24.53 or 4.07 per cent), you get what is called the earnings yield. Many financial pros warn that bitcoin is in a speculative bubble that could burst anytime.

Key stock indexes in Europe also fell Friday.

Britain's FTSE 100 lost 1.5 percent while France's CAC 40 slid 1.5 percent. Hong Kong was down more than four percent and Sydney and Singapore each sank three percent.

The pound fell 0.1 percent to $1.4109.

In emerging markets, the South African rand ZAR= fell 0.7 percent and the Chinese yuan and Polish zloty PLN= 0.2 percent.

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